The aggressive acquisition strategy that spurred Genesis Direct to add 18 catalogs catalogs in the last 12 months and go public earlier this year has been ground to a halt by poor operating performance and has turned the industry consolidator into a takeover target.
In releasing its second-quarter results last week, Genesis Direct, Secaucus, NJ, announced that it had retained the investment banks Goldman, Sachs and Schroder & Co. to field unsolicited inquiries regarding a possible acquisition or investment.
Genesis chief marketing officer David Sable would not comment on possible suitors. The company's chief asset, a database of 24 million names from its 36 catalog brands, is attractive to retailers and catalogers. Among its titles are the official catalogs of Major League Baseball (Manny's Baseball Land), the National Hockey League (Hot Off the Ice), Ninos and Carol Wright Gifts.
Genesis stock fell to a low of $2 in mid-October from a May IPO price of $15 and was trading in the $5 per share range last week. The lagging stock price has forced the company to curtail acquisitions. Ongoing operations will be paid for with cash.
“Clearly the acquisition issue is related to where our stock price is. That has temporarily changed the paradigm for us in terms of acquisitions,'' Sable said.
Catalog consultant Bill Dean of W.A. Dean & Associates, San Francisco, blamed Genesis' situation in part on the recent shakeup of the stock market and a lack of understanding by the investment community on how to evaluate catalog and direct marketing businesses.
“If they see a program that looks out of whack, boom! They drop the share price,'' Dean said. “[Genesis] is suffering as much from its stock price as it is from any internal operational snafus.''
The company also announced that it is eliminating five catalog brands that account for annual sales of $10 million. One is a sports catalog targeted to Europe that has been put on hold because of the NBA strike. The others were not disclosed.
In other efforts to cut costs, all company facilities except its New Jersey headquarters and Memphis, TN, distribution center will be closed. Sable said the closures will not result in any layoffs. Genesis also is decreasing prospecting costs by reducing the use of rented mailing lists and relying more on its own database. Its database will be expanded through strategic marketing alliances and partnerships like the one Genesis struck last week with Web portal Yahoo, Santa Clara, CA.
Under the agreement, visitors to the Yahoo sports site will be linked to the new Genesis catalog Web site ProTeam.com. Genesis has established links down to the individual team level and will use every type of Internet marketing available to promote its e-commerce site.
The announced measures are designed to help offset Genesis' mounting operating losses. Despite revenue growth of 257 percent to $41 million for the second quarter and 192 percent to $74.8 million for the first six months of the fiscal year, net losses rose over both periods and now stand at $45.2 million or $1.44 per share.
Genesis president/CEO Warren Struhl blamed the poor performance on shipping delays caused by system upgrades, high backorder rates and lower-than-expected sales from the September acquisition of Carol Wright Gifts. Lower gross margins, higher fixed costs, order taking and fulfillment expenses also were cited.
Kelly Armstrong, an analyst with Wheat First Securities, Richmond, VA, questioned whether or not the company's recent acquisitions have deviated from its business model.
“The status quo is not working,'' Armstrong said. “I'm a little disappointed in their execution. They have had a number of hiccups, which makes you question long-term viability.''
Dean, pointing to the recent activity of cataloger Fingerhut, said rapid acquisition itself is not the problem so much as the assimilation of those assets into the existing Genesis infrastructure.